Politics

AUSTIN (AP) ― Last summer, visions of tax rebates danced in the heads of Republican leaders at the mere mention of an $11 billion state budget surplus. Texas, they claimed, had dodged the national meltdown.

Six months later, the surplus appears to have shriveled as costs mount and worsening economic news starts to shrink once-robust tax returns.

The state's budget is being hit with up to $2 billion for its share of costs from Hurricane Ike, rapid growth in Medicaid costs and enrollment, lower oil prices that might mean less income in the state's Rainy Day Fund, slowed consumer spending and lower-than-projected revenues from the state's new business tax in the fund intended to pay for public schools.

The fraction of the projected $11 billion surplus that was left unencumbered will almost certainly be eaten up early in the upcoming legislative session by costs of Ike and Medicaid enrollment growth. Those items could cost together as much as $3.2 billion in the 2008-2009 budget before they even get started on the 2010-2011 budget, Lt. Gov. David Dewhurst and House Speaker Tom Craddick said recently.

The costs of Ike, the Sept. 13 hurricane that socked the Gulf Coast, are estimated to top $15 billion total, but the state expects the federal government to cover at least 75 percent of that.

Lawmakers are scheduled to convene in Austin Jan. 13 for the biennial 140-day legislative session. The state budget -- $167 billion for the current two-year period -- is the only legislation they're legally required to pass.

The first noticeable chink in the state's economic armor came last month when Gov. Rick Perry urged state agencies to lower their budget requests and cut spending. Agencies responded by cutting travel expenses for training and seminars.

The estimated $11 billion surplus was made up of three parts:

-- $5.7 billion in taxes that companies pay when oil and gas is retrieved from Texas land. That estimated portion of the oil and gas tax money goes into the so-called Rainy Day Fund, a savings account that can only be tapped with the approval of a supermajority of the Legislature.

-- $3 billion set aside two years ago to give to schools to make up for property tax cuts.

-- $2 billion that would have been leftover for spending.

But even that leftover amount may not be available as consumer spending plummets and with it, sales tax revenue.

The official estimate -- the number lawmakers use to write the budget -- won't be known until Comptroller Susan Combs announces it Jan. 12. Depressed consumer spending could further deplete that total.

"We're talking about 'what if,"' Dewhurst cautioned. "We're still waiting to see what the revenue estimate is from the comptroller."

Further exacerbating budget uncertainties, health care costs are rapidly rising and enrollment in entitlement programs is expected to grow with the economic slowdown.

"I think the other problem we face out there is that our economy, as it gets softer, you have more people going in to these programs," Craddick said recently. "And that makes a big difference you can't estimate. You'll see that in (the Children's Health Insurance Program) and everything else."

Even with $3 billion stashed away for schools, the property tax relief fund will fall at least $5 billion short of the $14 billion hole lawmakers created two years ago when they lowered school property tax rates by a third. That's mostly because revenues from the new business tax -- revamped to take the place of some school property taxes in education funding -- aren't as much as expected.

This year, it appears that money will be available without having to cut from other state spending. But it will take a bite out the state's economic growth that would have otherwise padded the surplus. And as the economy continues to slow, it becomes increasingly unlikely that enough money will be available to pay for the hole in tax revenues without creating a shortfall in the future.

At a recent meeting of the Legislative Budget Board, executive director John O'Brien urged leaders to be prudent this session.

"Education, health and human services, health care, employee benefits -- they're going to be going against that available revenue and going to get us a little bit out of whack," he said. "I hope you all do what you did last time, leave some of that money on the table.

"Save some money for what might be a rough 2011 session," he said.

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